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Second-Degree Price Discrimination with declining AC

Second-degree price discrimination is pricing according to quantity consumed--or in blocks. P 1. Without discrimination: P = P 0 and Q = Q 0 . With second-degree discrimination there are three prices P 1 , P 2 , and P 3 . (e.g. electric utilities), not P 4. P 0. P 2. AC. P 3. MC. D.

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Second-Degree Price Discrimination with declining AC

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  1. Second-degree price discrimination is pricing according to quantity consumed--or in blocks. P1 Without discrimination: P = P0 and Q = Q0. With second-degree discrimination there are three prices P1, P2, and P3. (e.g. electric utilities), not P4 P0 P2 AC P3 MC D MR Q1 Q0 Q2 Q3 1st Block 2nd Block 3rd Block Second-Degree Price Discrimination with declining AC $/Q P Consumer surplus is sum of triangles PAP1, ACF, CDG (not DHE) A B Note at P2,P3 blocks, prices charged are uniform; hence no question of falling MR; So, problem of MR<MC doesn’t arise. C F D G H P4 E With blocks (P1, Q1), (P2,Q2), (P3,Q3), deadweight loss becomes zero Q4 Quantity 4th Block

  2. Second-Degree Price Discrimination with U-shaped AC Profit-maximizing combination= (P2,Q2), if uniform price is charged $/Q P MC A1 P1 AC B2 A2 In case of second-degree price discrimination, price-block combinations (P1,Q1), (P2,Q2), (P3,Q3), (P4,Q4) are possible w/o DWL. But if combinations stop at (P3,Q3), then there will be some DWL. Combination (P5,Q5) not feasible as MC>P5. P2 A3 B3 P3 B4 A4 P4 A5 P5 B5 AR MR Q Q1 Q2 Q3 Q4 Q5

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